Issues Surrounding Facebook IPO

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Facebook decision of going public impacts on users

Users of Facebook should expect a renewed Facebook with many new applications, and services that will ensure they maximize use of Facebook. The company will create seamless applications using mobile platform for convenience of its users.

Facebook will have a challenge of raising money for its shareholders. Thus, Facebook must generate lots of revenues from its users. Users can expect Facebook to increase frequencies of advertisements than previously experienced. In addition, it shall also development new forms of advertisements for its users.

Users can also expect Facebook to enhance its customer services. This shall present a challenge to the company because it must balance its revenue growth and customers’ satisfaction.

You use Facebook almost every day. So, is this an IPO you think you should’ve bought?

Having used Facebook for quite some time, buying shares would have been futile as a small investor since the shares of an IPO initially get to the hands of influential clients like enormous institution investors, mutual funds, and risk taking investment companies. Buying the share on the initial day of trading would not make sensible return.

The stock trades below 40% of the initial public offer for quite a while. Also, the demand of shares has shot up resulting to Facebook raising the target price range for its stock. The company changed its share prices several times from $28 per share before settling on $35 per share.

How is it already overpriced?

Facebook had overvalued IPO shares. A number of investors noticed that Facebook IPO share prices were too high. The share price of $ 35 overvalued the company 70 times against Facebook earnings of 50 cents per share. In addition, the share price also overvalued it 18 times against the projected revenue of five billion dollars. According to behavioral finance, such overvaluation of the IPO price could have occurred as a result of many investors overconfidence in the company’s shares (Mishkin 147).

IPO pricing has been a challenge for many companies. Facebook preferred high prices in order to maximize revenues. On the other hand, investment banks do not pay much attention to pricing because they have interests in luring large number of investors. Investment banks believe that such small investors will increase demands and increase share prices of the company. This gives Facebook opportunities for further offering of its shares to many investors. Consequently, investment banks shall benefit from their deals.

Did Mark Zuckerberg and his banker buddies deliberately hose retail investors on behalf of institutional insiders?

Most investors did not like the extent to which Facebook exercised control over its IPO and the action of the company’s underwriters. Observes argue that Facebook came up with its own prospectus. There are also reports that the company’s Chief Financial Officer shared his doubts about the value banks would make of the IPO.

The issue is that Facebook used implied valuations from “thinly traded secondary markets such as SecondMarket or Sharespost. The company prospectus claimed that valuation relied on recent private stock sale transactions between periods Q1-2011 and Q1-2012” (Pepitone 2012).

There is also the issue of selective disclosure. Some shareholders claim that Facebook executives revealed the company’s financial position to some banks before the IPO. This was the basis of lawsuits. They claim that the company did not disclose problems with its mobile revenues.

Facebook admits that it had “follow-up conversations” with analysts from investment banks that were underwriting the IPO. The plaintiffs claimed that the banks’ investments analysts revealed their opinions about the future of the IPO with some intuitional investors (Caseolus 2012; Koba 2012).

There are conflicting reports about demand. How can Facebook’s IPO be oversubscribed and still suffer from weaker demand?

According Bloomberg, Facebook IPO was “generating lower-than-expected demand from shareholders”. On the other hand, Reuters claimed that Facebook IPO demands outpaced numbers of offered shares.

No investor can ascertain the claims of these reports. Some argued that such claims could have emanated from competing interests such investments banks to enable them manipulate the share prices. This is a caveat of rational expectation theory i.e. not everyone in a “financial market must be well informed about a security or have rational expectations for the efficient market condition to hold” (Mishkin 147). Thus, Facebook IPO did not operate in an efficient market.

How will Facebook change as a public company?

Like any other public company, Facebook will focus on creating values for its shareholders by generating more revenue than ever before. Shareholders will demand steady and ever-increasing profits. Facebook will also spend in acquisitions and takeovers of other companies especially those in a photo-sharing business. The company shall engage in innovation than before to increase its customer base and retention. Both the public and the government shall scrutinize operation of the company for compliance.

Is that where the “Instagram” acquisition comes in? How does that affect the IPO?

Facebook looks at Instagram as a platform to solve its mobile revenue issues. Mobile industry will be the next source of revenue for Facebook. Instagram will offer what Facebook lacks (advanced photo sharing platform). The price of $1 billion shows that Facebook has a niche for mobile revenue in its plans.

There are also issues with the acquisition of Instagram leading to its probe. The probe may force most investors not to purchase Facebook shares as they weigh risks that come with investment in Facebook shares. On the other hand, some investors may consider acquisition of Instagram as a positive move for Facebook so that it can generate revenue from the mobile industry.

Works Cited

Caseolus, Stephen. Facebook IPO Investors: Muppets Or Mavericks? 2012. Web.

Koba, Mark. Facebook’s IPO: What We Know Now. 2012. Web.

Mishkin, Frederic S. A Rational Expectations Approach to Macroeconomics: Testing Policy Ineffectiveness and Efficient-Markets Models. Chicago: University of Chicago Press, 1983. Print.

Pepitone, Julianne. Facebook: IPO debacle was Nasdaq’s fault. 2012. Web.

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